When news about the $700 billion bailout plan first came out last month, the U.S. stock market staged a big rally on September 18 and 19. The S&P 500 index rose 8.5% in two days. Respected author Larry Swedroe posted this on the Bogleheads forum on Sunday, September 21:
“It is often discussed about TLH  whether to wait 31 days and reinvest or immediately.
“As you know I have been proponent of not waiting for two reasons–every day you are out of market you miss the ERP . But you also have far greater chance of missing a big up then avoiding a big down. Using 5% as the definition of “big” I found 70% more likely to miss the big up than avoid the big down
“Imagine harvesting losses a few days ago and sitting it out now. Already missed about 8% –of course we dont know the eventual outcome.”
 TLH: Tax Loss Harvesting. The practice of selling an asset for a tax loss and then either immediately purchase a similar asset or wait 30 days before buying back the same asset.
 ERP: Equity Risk Premium. Stocks have a higher expected return than cash or bonds.
Yes, imagine that. I bet whoever sold on Sept. 17 for tax loss harvesting and decided to sit out in cash for the next 30 days had NO idea what kind of a dizzying fun ride he was going to miss.
Today is Oct. 20. Our hypothetical investor who sold for tax loss on Sept. 17 can buy back the same fund now without triggering a wash sale. The trading day just started but it looks like our investor can buy back at a price at least 15% lower than what he sold at. This once again shows how unreal the argument is for missing the best days in the market. Our investor missed the best day in the market in 70 years. His investment return not only didn’t suffer but it will actually be higher.
Larry Swedroe argued that because there is an equity risk premium, for each day an investor is out of the market, he loses the equity risk premium. Well it doesn’t work neatly like that. While there is an equity risk premium, the stock market does not go up in a straight line. In a short period like 31 days, the chance of the stock market going down is as good as the chance of it going up, especially when the market is already down which triggered the tax loss in the first place.
I pulled the daily closing prices of Vanguard Total Stock Market ETF (VTI) in 2008 and compared them with prices 31 days earlier. If an investor sold for tax losses and sat in cash for 31 days, 54% of the time this investor would see a lower price on day 31. For the other 46% of the time when the price was higher on day 31, the investor didn’t have to wait too long before he would see a lower price again, at which point he could complete the repurchase for tax loss harvesting and suffer no loss from being out of the market or even profit from it.
|Additional Wait after 31 Days for a Lower Price||Cumulative %|
|up to 10 days||64%|
|up to 30 days||78%|
|up to 60 days||91%|
|up to 90 days||100%|
If you’d like to look at more data from this unscientific sample, the spreadsheet is here:
What if someone sold on October 10, right before the 11.6% jump on October 13? Let’s see how long it will take for a lower price to show up this time. I’m afraid it won’t be too long.
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